“Home prices in the U.S. are likely to start to stabilize, or touch bottom, sometime in the first half of 2009, though prices could continue to drift lower through 2009 and beyond.”

WHY IT MATTERS

“A necessary condition for an end to the current global financial crisis is the stabilization of the price of homes in the U.S. Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities. We won’t really know the market value of the asset side of the banking system’s balance sheet — and hence banks’ capital — until then.”

IMMIGRATION

“Public policy can hasten this process by not prematurely propping up housing starts and by expanding the underlying demand for homes generally. The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants. Skilled immigrants tend to form new households, by far the most important source of new home demand. The number of new households in the U.S. is increasing at a rate of about 800,000 a year, of which about a third are immigrants. Perhaps 150,000 of those are loosely classified as skilled. A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale — and hence help stabilize prices.”

FORECLOSURE AVOIDANCE

“It’s a good idea. Foreclosures don’t help anybody. It’s costly to the holder of the mortgage and disaster for the homeowner. In the days before we sliced and diced mortgages into securities, when the borrower got into trouble, he’d come to the assistant vice president of the local S&L and get agreement to stretch out the payments or restructure the loans in a deal that worked for both parties… Until the recent surge in foreclosures, more than half of all loans that went into foreclosure were ‘cured’ without the sale of the property.”

SUPPLY GLUT

“U.S. home prices will stabilize only as the current huge 800,000 excess of vacant single-family homes for sale is dramatically reduced and prices deflate to the level consistent with the historical rate of return on owning a home that prevailed before the price surge in the U.S. and elsewhere.”

Mr. Greenspan’s forecast rests on two pillars of data. One is the supply of vacant single-family homes for sale, both newly completed new homes and existing homes owned by investors and lenders.

“New single-family home completions are currently just barely under the rate of home demand generated by household formation and replacement needs. Only early next year will the current suppressed level of housing starts be reflected in completion levels consistent with a sufficiently rapid rate of liquidation to materially reduce the bloated inventory excess.”

“We seem to be approaching a peak in the number of new foreclosures, though the number in foreclosure will continue to rise for awhile.”

The other pillar is a comparison of the current price of houses — he prefers the S&P/Case-Shiller National Home Price Index — with the government’s estimate of what it costs to rent a single-family house.

“It’s the imbalance of supply and demand which causes prices to go down, but it’s ultimately the valuation process of the use of the commodity…which tells you where the bottom is. For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It’ll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level.”

FANNIE MAE & FREDDIE MAC

“The issue is how you get a viable mortgage market when this is all over. What happens in 2010 or 2011?”

What is your opinion of the recently legislated solution? “Bad.”

“It does not alter the flawed model. A new regulator does not have that capability.”

“This was the ideal opportunity to come to grips with what is a fundamentally flawed model, which privatizes profits and socializes losses, which is fiscally tolerable in small amounts but in trillions of dollars, it isn’t”

“They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted with necessary taxpayer support to make them financially viable as five or 10 individual privately held units, and auctioned off. The affordable housing programs should be put into GNMA; or another government agency. By the time we have the next mortgage crisis, the five or 10 individual companies would have diversified into other areas of finance, and maybe one or two of them would fail. But having been significantly downsized, systemic risk would be avoided.”

Why the government had to back Fannie and Freddie debt: “When Bear Stearns was bailed out, it was inevitable. There’s no credible argument for bailing out Bear Stearns and not the GSEs.”

On the argument that markets would react adversely if U.S. government took the Fannie and Freddie’s debt onto its books: “Untrue. The law that stipulates that GSEs are not backed by the full faith and credit of the U.S. government is disbelieved. The market believes the government guarantee is there. Foreigners believe the guarantee is there. The only fiscal change is for someone to change the bookkeeping.”

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